Events conspiring against gas prices

The Department of Energy expects U.S. motorists will not pay as much for gasoline as last summer, but events in Venezuela, Iraq and the Middle East could make the forecast obsolete, analysts said.

In its summer gasoline outlook released Monday, the Energy Information Administration estimated gasoline prices for a gallon of regular unleaded would range between $1.36 and $1.57, with a baseline average of $1.46. The average would be 5 percent lower than the 2001 summer average of $1.54, the report said.

In Chicago, a gallon of regular unleaded gasoline already averages $1.60, up 31 cents from a month ago, according to the AAA Chicago Motor Club. Last year at this time, a gallon of gasoline averaged $1.59 in the area.

But even as Secretary of Energy Spencer Abraham announced the estimates at a news conference in Washington, international events seemed to overtake the government's forecast.

In Venezuela, blue-collar workers and managers of Petroleos de Venezuela, which owns Citgo refineries and gasoline stations in the U.S., were in revolt, with exports severely hampered.

Also Monday, Saddam Hussein said Iraq would immediately cut oil exports for a 30-day period to protest Israeli military actions in the Palestinian territories.

In reaction, prices for West Texas Intermediate crude closed at $26.54, up 33 cents, or 1.2 percent, from Friday's close of $26.21 on the New York Mercantile Exchange.

Barring all-out war in the Middle East, David Costello, an economist with the Energy Information Administration, said several factors still make lower gasoline prices likely this summer.

"In the U.S., gasoline supplies are more ample than last year; though in the Midwest they are still below the historical average," he said. But new pipeline capacity to Chicago is likely to offset potential supply problems.

In addition, costs to make oxygenates, including ethanol--widely used in the Chicago-Milwaukee market--are much lower this year because natural gas, a major component used to make ethanol, isn't as expensive as last year, Costello said.

The cost to produce gasoline for the region is higher than for other parts of the country because of federal and state laws requiring cleaner-burning reformulated gasoline. Last year, the Federal Trade Commission found some oil companies intentionally withheld supplies of reformulated fuel to maximize profits during the severe spike in gasoline prices in the summer of 2000.

Still, the Venezuelan situation seems to raise the most concerns as far as U.S. gasoline prices are concerned.

"Venezuela is the most direct gasoline issue," said Amy Myers Jaffe, senior energy adviser at the James A. Baker III Institute for Public Policy at Rice University in Houston. "Venezuela's one of the largest gasoline exporters to the U.S. and the Venezuelan refineries fill all those Citgo stations around the country."

The potential shortfall created by the loss of Venezuelan gasoline to the U.S. creates additional pressures on other oil companies to increase supply to make up for the loss.

John Kingston, global oil editor for Platts, an energy information service, sees less harm from the Iraqi embargo.

"I give them credit for Economics 101," he said. "They've recognized that they've got to take all their oil out of production."

But with oil prices at $27 to $28 a barrel, Kingston questioned whether Iraq would be successful in keeping oil off the market.